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Amazing Gains
Subject Productivity
Topic Productivity and Growth
Key Words Productivity, Growth, Standard of Living, Inflation
News Story

At least one economist has called the latest productivity figures amazing. Productivity in the first quarter of 2002 increased at an annual rate of 8.6 percent - the largest quarterly gain since 1983. Except for a small decline in the first quarter of 2001, productivity has increased continuously over the past two years, even in the face of an economic slowdown. Previously, in the first four quarters following a recession, productivity growth averaged 0.5 percent. In contrast, productivity has increased 4.3 percent since March 2001, the start of this last recession. The latest productivity figures are evidence that the recession has not derailed the significant trend in increased productivity that started in the mid-1990s.

When productivity increases rapidly, firms do not have to raise prices when wages increase. Corporate profits and wages can both increase without causing inflation to accelerate. The large increase in productivity this quarter follows a 5.5 percent rise in the fourth quarter of 2001. These gains are one reason the Federal Reserve has not increased interest rates from the current low rate of 1.75 percent in the face of a 5.8 percent increase in economic growth in the first quarter.

Martin N. Baily, a productivity expert at the Institute for International Economics, estimates that since the mid-1990s, the long-term trend in productivity growth is a 2.4 percent annual rate, more than twice the rate in the 1970s and 1980s. Productivity increases keep inflation in check and raise our standard of living, but there is a downside to these gains. Increases in output per man-hour enable employers to increase output without hiring new workers. Consequently, many of the jobs lost during the recession will not be regained very quickly. Last month's increase in the unemployment rate to 6 percent is evidence of this effect.

The large jump in productivity is partly the result of the rebound in production. As economic growth slows, as it is forecast to do for the rest of the year, it is expected that productivity will slow also.

(Updated June 1, 2002)

Questions
1. How is productivity measured?
2. Historically, productivity typically declines during a recession. Explain why this is likely to be the case.
3. Explain how increases in productivity can lead to higher wages and higher profits.
Source John M. Berry, "Productivity Surged in First Quarter," The Washington Post, May 8, 2002.

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